‍Why is proper documentation of intra-group finance transactions required?

Proper documentation of intra-group finance transactions (like loans, guarantees, or cash pooling between entities within the same corporate group) is crucial for several reasons, especially from a tax, legal, and regulatory perspective. Here's a breakdown:

1. Transfer Pricing Compliance

Intra-group transactions must be conducted at arm’s length, meaning under the same terms as if the entities were unrelated. Why it matters: Tax authorities scrutinize these transactions to ensure profits aren’t artificially shifted to low-tax jurisdictions. Good documentation shows that interest rates are market-based, the loan terms are commercially reasonable and  there’s a clear business purpose.

2. Tax Audit Defense

Proper records help defend the group's position during tax audits, especially with respect to transfer pricing adjustments, double taxation and penalties and interest on underpaid tax.

3. Legal and Regulatory Compliance

Some jurisdictions have thin capitalization rules, withholding tax rules, or exchange control regulations that apply to cross-border financing. Proper documentation should prove that the borrower has capacity and intent to repay and that market conform terms apply (such as representations, covenants and events of default). In some jurisdictions the directors of a company may be personally liable if a loan is not repaid and the lending company has not taken proper measures to prevent this (such as a regular check on the creditworthiness of the borrowing company).

4. Management and Risk Control

Clear documentation ensures the group treasury can manage cash, liquidity, and counterparty risk efficiently. This prevents disputes between group entities, misunderstanding of terms and errors in interest calculations or repayments.

We can check and draft proper intragroup loan documentation. If a holding offers various intra group services, we can help to draft a so-called in-house bank agreement. Such agreement may include the legal terms of intragroup term loans, revolving credit facilities, guarantees, derivatives, intra group netting, payments and receipts on behalf etc.

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